Thursday, July 22, 2010

The law of diminishing returns is, of course, the famous economic law that as you add additional units of one factor of production, holding other factors constant, then the additional increments of output produced tend to decline. The original story was about how much additional food could be produced by adding additional units of labour to a constant amount of land, other things being equal. It has been possible, of course, to avoid the Malthusian consequences of diminishing returns by making more use of capital equipment and using more efficient technology etc.

The law of diminishing returns was probably hardwired into my brain when I was studying economics as an undergraduate over 40 years ago. In any case, when I first saw a data set providing ratings of life satisfaction and of seven domains (standard of living, health, achieving, personal relationships, safety, community connectedness and future security) it seemed natural to expect that the law of diminishing returns would apply to each of those domains. So, for example, I expected the additional life satisfaction that accompanied an increase in rating on ‘achieving in life’ from 7 to 8 would be greater than that accompanying an increase in rating from 8 to 9. It turns out, however, that my expectations were wide of the mark - at least for the data set I was using (the Australian Unity quality of life data set, Survey 13, 2005, with useable data for 1,956 respondents). The relationships between the various domains of life satisfaction aren't actually much like the relationships between fertilizer applications and crop yields.

Some time last year I decided to try to use regression to find a simple production function (there I go again) that provided a good explanation of life satisfaction in terms of the seven domains. The estimated coefficients for factors other than ‘achieving in life’ were then used to hold the influence of these factors constant at their average values in order to examine how life satisfaction varies with changes in the ‘achieving in life’ rating.

I thought a Cobb-Douglas production function, which is probably the simplest form of production function incorporating diminishing returns, would probably be appropriate. But a simple linear production function better fitted the data. The functional form that I eventually settled on is a simple linear relationship that is anchored at the top end of the scale, so that if there is a rating of 10 on all 7 domains the predicted rating for life satisfaction must also be 10. The estimated coefficients for this restricted least squares regression were similar to those for ordinary least squares, but the restriction enables better use of available information (Adjusted R squared = 0.81 versus 0.51). The estimated coefficients were as follows (followed by standard errors in brackets):

Now, we know that a linear production function is inconsistent with the law of diminishing returns. The model predicts, for example, that an increase in achieving rating from 7 to 8, will result in the same increase in life satisfaction rating (+0.272) as for an increase from 8 to 9. But this doesn’t necessarily mean that the estimated model fits the data well over the full range of variation in achieving ratings. One way to test this is to use the estimated coefficients to hold other factors are constant at their average values and to examine how remaining variation in life satisfaction is related to achieving ratings. The results are shown in the chart below.

It is evident from the chart that the linear model prediction of how life satisfaction varies with achieving tracks fairly closely the estimate of life satisfaction with variables other than achieving held constant. In other words we can be fairly confident that diminishing returns does not apply to achieving.

The chart also shows large gaps between the estimates of life satisfaction with variables other than achieving held constant and average life satisfaction levels. This reflects correlation between ratings on achieving and ratings on other variables. This could be because of causal relationships between various domains or because ratings on different domains are influenced by common factors such as personal disposition or temperament.

I’m reluctant to post the results of this little piece of research because I can’t claim any expertise in this area (and my ignorance might be fairly obvious to people who do have such expertise). But the results of this exercise seem to me to have some implications for the question that I raised in my last post about the appropriate balance between different domains such as achieving and relationships. The absence of diminishing returns to achieving does not mean that high achieving by itself is likely to give many people very high life satisfaction. That usually requires high ratings on relationships and on the other domains as well. But we shouldn’t assume that achieving and relationships are completely independent. There is higher positive correlation between relationship ratings and achieving ratings (0.4) than between relationship ratings and the ratings for any of the other domains.
Does this mean that high achievers find it easier to maintain good relationships with others? Or, does it mean that people tend to view maintaining good relations with others as an achievement?

Monday, July 12, 2010

In my last post I expressed disappointment that the authors of an article about material prosperity and life satisfaction did not acknowledge the sense of achievement that many people obtain from their work.

How do I know that meaningful work contributes to life satisfaction? It would be easy enough to make a fairly long list of people I know who probably get a great deal of satisfaction from their work. I expect many readers could make similar lists. There is also some research evidence on this question.

It is well known that unemployed people tend to have much lower levels of life satisfaction than people in other workforce categories (including those who have retired). The Australian Unity Wellbeing Index indicates, however, that unemployed people also tend to have much lower levels of satisfaction with what they are achieving in life. There is also a marked difference in satisfaction with ‘achieving in life’ between employed people who are looking for alternative work and those not looking for work. Robert Cummins et al, authors of the report, suggest that low satisfaction with what they are achieving in life may be one of the main reasons why people seek to change their employment. The authors add: ‘Many employed people gain a great sense of ‘purpose in life’ from their employment, and having a sense of purpose is central to wellbeing’ (See: Report 17, April 2007, p. 164-5 and Figures 8.9 and 8.18).

Research on the relative contributions to life satisfaction of orientations to pleasure, engagement (the psychological state that accompanies highly engaging activities) and meaning (pursuit of a meaningful life) is also relevant. Christopher Peterson, Nansook Park and Martin Seligman have found (using data from an internet survey) that orientations to engagement and meaning have a greater impact on life satisfaction than does pleasure. The authors also found somewhat higher life satisfaction scores for respondents simultaneously near the top of all three orientations and notably lower scores for respondents simultaneously near the bottom of all three orientations (‘Orientations to happiness and life satisfaction: The full life versus the empty life’, Journal of Happiness Studies, 2005).

A short article by Amanda Horne on the ‘Positive Psychology News Daily’ site refers to research by Michael Steger and Bryan Dik which suggests that meaningful work is associated with people developing a sense of identity which comes from knowing ‘who they are, how their world works and how they fit in with and related to the life around them’ and ‘people’s identification of, and intention to pursue, particularly highly valued, over-arching life goals’ (Chapter on finding meaning at work in Oxford Handbook of Positive Psychology and Work).

One of the points emphasised by Peter Warr, the author of extensive research on happiness in the workplace, is whether individuals want to be in the role they have been assigned, the value to them of different role characteristics and the attractiveness of core tasks. He suggests that such matters can have major implications for individual happiness. Warr also notes:

‘Some happiness is not actually accompanied by feelings of pleasure, or satisfaction of desires. This second form of happiness invokes reference standards of some kind, perhaps some realization of personal potential’ (‘Searching for happiness at work’, The Psychologist, Dec. 2007).

Some people might wonder why people who claim to get a great sense of achievement from their work often require high levels of remuneration for their services. I think this might have a lot to do with rationing of their time. Successful actors, sporting professionals, business leaders, artists etc. can be fairly sure that by requiring high levels of remuneration their services will be purchased by people who will appreciate them. They also know that can always give their wealth away if they feel embarrassed by the amount they are accumulating for doing things they might be happy doing for nothing.

Consideration of the way high-achievers allocate their time raises some obvious questions about the importance to life satisfaction of an appropriate balance between work and home life and between different domains such as ‘achieving in life’ and ‘personal relationships’. That might be a good subject for a later post.

Tuesday, July 6, 2010

‘Contrary to both those who say money is not associated with happiness and those who say that it is extremely important, we found that money is much more related to some forms of well-being than it is to others. Income is most strongly associated with the life evaluation form of well-being, which is a reflective judgment on people’s lives compared with what they want them to be. Although statistically significant, the association of income with positive and negative feelings was modest’ (Ed Diener, Weiting Ng, James Harta and Raksha Arora, ‘Wealth and happiness across the world ...’, Journal of Personality and Social Psychology, (99:1), 2010, p. 60. Media reports: here and here.)

In my view this recent article makes an important contribution to understanding of the relationship between wealth and emotional well-being by attempting to disentangle the determinants of life satisfaction and positive feelings. The article, based on data from the Gallup World Poll, suggests that while satisfaction with standard of living has a substantial impact on satisfaction with life as a whole it has little impact on positive or negative feelings (emotions experienced ‘yesterday’).

The study uses satisfaction with standard of living and a measure of whether people own luxury conveniences (TV, computers etc) as proxy measures of fulfillment of material desires. The basic idea is that people learn to desire material goods because of their social situation (including the influence of advertising) and the fulfillment of these desires leads to feelings of well-being. Some groups (e.g. the Amish) seem to be reasonably happy without much income because they have relatively low aspirations for material goods.

The authors link their findings to the distinction that Tibor Scitovsky made between comfort and pleasure (‘The Joyless Economy’, 1978). They suggest that ‘it may be that’ comforts increase life evaluations whereas pleasures increase reports of positive feelings:

‘Comfort comes from having one’s needs and desires continuously fulfilled, whereas pleasures come from fulfilling unmet needs and from stimulating and challenging activities. One source of pleasure according to Scitovsky is social stimulation, which he suggested lies largely outside the realm of economics. Novelty and learning can be sources of pleasure too. Thus, Scitovsky’s reasoning is in accord with our findings that wealth predicts life satisfaction, and social relationships and learning new things predict positive feelings’ p.59 .

I found that passage fairly challenging, but reading it didn’t give me positive feelings. I don’t have too many problems with the idea that being satisfied with your standard of living is closely related to comfort, but there are other factors related to economic activity - such as a sense of achievement - that may also make an important contribution to life satisfaction.

A couple of years ago I attempted to identify how necessary various domains of quality of life are to high satisfaction with life as a whole using data compiled by the Australian Centre on Quality of Life (reported here). The criterion used was the percentage of respondents with high satisfaction with life as a whole among those with low ratings on particular domains of quality of life. The percentages were follows (ranked in order of importance of each domain): personal relationships 10.8%, achieving in life 11.8%, standard of living 12.8%, future security 15.6%, health 15.9%, community connectedness 19.0% and safety 20.3%. The results suggest that ‘achieving in life’ at least as necessary to high life satisfaction for Australians as is ‘standard of living’.

I do not claim that working for money is the only way that people can obtain a strong sense of achievement, but it would be very surprising if this feeling is unrelated to economic activity.

Postscript:
I could also have mentioned the neurological evidence that humans (and rats and presumably other animals as well) get more satisfaction from actively working for a reward than from getting it without doing anything to earn it. (See: Gregory Burns, 'Satisfaction', 2005, pp. 43-45.)

Emancipation

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